JPMorgan Chase’s announcement last week that it will stop making student loans leaves just one big bank still in the business: Wells Fargo.

“Thereís been a focus on accumulating capital over the last few years and cutting the types of lending that arenít seen as a core business.”

Kevin Cole, analyst at Standard & Poor

JPMorgan Chase’s announcement last week that it will stop making student loans leaves just one big bank still in the business: Wells Fargo.

The San Francisco bank has steadily increased its presence in the market as its peers have streamed for the exits since the financial crisis. Wells’ private student loan portfolio has grown 6 percent in the past year, according to data the bank provides to investors.

Now, Wells Fargo is the nation’s second-largest private student lender behind only Sallie Mae — a company that focuses primarily on education loans. Together with Discover Financial, the three originate more than three-quarters of the nation’s private student loans, according to a report from ratings agency Standard & Poor’s.

Why does Wells still want to offer student loans?

“I get that question asked fairly commonly,” particularly when another bank jumps out, said John Rasmussen, Wells Fargo’s head of education finance. He said the business is part of the bank’s strategy of offering a customer as many different products as it can.

From a bank’s perspective, student loans bring in an interest rate that compares favorably with auto loans and mortgages. They’re often co-signed by a family member with good credit, and borrowers can’t get out of them in bankruptcy.

But being in the market now means Wells Fargo will have to deal with heightened scrutiny from regulators, who have focused on the private student lending market in particular.

Banks have steadily left the private student loan market over the past three years as the federal government has taken on the most prominent role in education lending. More than 90 percent of student loans today come straight from Washington, according to Standard & Poor’s — making it harder for private lenders to expand in the market.

For Wells, the financial risk is likely small: Student loans make up only a small portion of the bank’s total loan portfolio. But scrutiny in an era of rising student loan defaults, analysts say, has given some banks pause about the “headline risk” of being in the business. JPMorgan Chase’s exit now leaves Wells as the most prominent bank left to navigate potential new rules from Washington.

Wells Fargo is working with the Consumer Financial Protection Bureau to develop new programs to modify student loans that become delinquent, Rasmussen said. The bureau would not comment on negotiations with particular banks.

Under these newer workout options, a borrower’s interest rate could be brought down from, say, 7 percent to zero or 1 percent for a while, then gradually ratcheted back up.

Advocacy groups have pushed for legislators to go further and let borrowers get out of private student loans in bankruptcy. Wells Fargo has lobbied on Capitol Hill against such a measure, Senate disclosure records show.

The nation’s big banks played a significant role in student lending in the early part of the 2000s, when they were allowed to originate loans backed by the federal government, and when there was a robust market for securities backed by private loans.

By 2008, banks made more than $20 billion in private student loans. The financial crisis dried up the market for the securities backed by the loans.

In 2010, President Barack Obama signed a law taking banks out of the government-backed student loan business. They’re now made directly by the federal government.

Popular Comments

Universities should take note. This is a good example of the market system. If
the gov't had been out of the student loan process, then universities would
be cutting costs or improving the product they produce so their students would
get
More..

1:57 p.m. Sept. 9, 2013

Top comment

worf

Mcallen, TX

Good! I'd love to see people work for what they get.

College is
so much better when combined with over coming stuggles.

5:02 p.m. Sept. 9, 2013

Top comment

worf

Mcallen, TX

Amazing how people can be hurt, but can't figure out who did it to them.